Schapiro’s warning on recruiting deals is offbase, some say

SEC Chairman Mary Schapiro’s concerns about broker recruitment deals are off-target, according to some brokerage industry observers and participants.
On Monday, she sent a letter to the heads of brokerage firms, warning them to be on the lookout for sales practice problems, such as churning, caused by “large upfront bonuses and enhanced commissions.”
But such deals don’t “encourage anyone to churn anything,” said Darin Manis, chief executive at RJ & Makay LLC in Colorado Springs, Colo., a recruitment firm.
Most transition packages, made as forgivable loans, are based on trailing production and, secondarily, on recruits’ success in bringing over assets.
Usually, back-end bonuses are based on bringing over assets, not production, Mr. Manis said.
Few recruitment deals offer special commission payouts, observers said.
A temporarily higher payout could, in theory, cause a broker to generate more business.
Smaller firms will sometimes offer accelerated payouts for a period of time, said recruiter Mindy Diamond, president of Diamond Consultants LLC in Chester, N.J.
“But the wirehouses have never done that,” she said.
The jawboning over recruitment cash is “typical of the SEC,” said one rep with UBS Financial Services Inc., who declined to speak for attribution.
“They’ve got no interest in investigating Bernie Madoff, but God forbid a broker gets some money, and they’ve got to jump all over that.”
When he joined the firm this year, this UBS broker received a package totaling about 200% of his production.
Indeed, Ms. Schapiro in some ways is following in the footsteps of former SEC Chairman Arthur Levitt, who in 1998 pushed for client disclosure of recruitment deals—and even threatened to ban recruiting incentives.
Mr. Levitt’s ideas were never implemented.
Ms. Diamond thinks Ms. Schapiro’s warning won’t result in fewer or smaller deals.
“[Recruitment] packages are part of the cost of doing business” for brokerage firms, she said.
The SEC press office did not immediately respond to a request for comment.